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CSAPR Is Stayed – What Are The Real World Ramifications?

Client Advisory

February 3, 2012
On December 30, 2011, less than 48 hours before it would have become effective, the Court of Appeals for the District of Columbia Circuit (“DC Circuit”) stayed implementation of the Cross State Air Pollution Rule (“CSAPR”), which was due to take effect on January 1, 2012. Published by the United States Environmental Protection Agency (“EPA”) on July 6, 2011, this far-reaching rule imposed strict caps on air emissions from power generating units located in states stretching from the Atlantic Seaboard to Texas.  The Court’s decision, set forth in EME Homer City Generation LP v. EPA, D.C. Cir. No. 11-1302 (December 30, 2011) stays the entire rule, pending completion of the Court’s review, and seeks a briefing plan from the parties, which would allow the Court to hear the matter on the merits in April 2012. This decision was rendered with very little explanation except for a terse finding that the requirements for a stay had been met.
 
By way of background, CSAPR required power companies in most of the eastern half of the country and Texas to further reduce emissions of sulfur dioxide (“SO2”) and nitrous oxide (“NOx”) to enable downwind states to achieve federal air quality standards for ozone and particulate matter. To implement this requirement, CSAPR established a cap and trade regime which could be used to mitigate the harshness of these requirements. This new rule essentially replaced EPA’s Clean Air Interstate Rule (“CAIR”), issued in 2005, which was struck down by the DC Circuit in 2008. However, in that decision, the DC Circuit allowed CAIR to remain in place until EPA was able to promulgate a replacement rule (which it did when it published CSAPR in July 2011). In fact, in EME, the Court may have mistakenly assumed that continued implementation of CAIR pending its review of CSPAR reduced the need to implement CSPAR in a timely manner, since it may not be fully aware that, given the glut of allowances under CAIR, it has lost most of its bite.
 
Following promulgation of CSAPR on July 6th, EPA continued to tinker with and augment the rule.  On October 6, 2011, EPA proposed revisions to CSAPR citing the need to do so based on the receipt of additional information from affected states. Pursuant to these revisions, certain states, including Texas and New York, received an increase of SO2 and NOx allowances. On December 16, 2011, EPA finalized a rule which added limits for NOx during ozone season in five states. In addition, in the past month, EPA also has published or proposed several other rules affecting the power generating sector. For example, on December 21, 2011, EPA published the Mercury and Air Toxics Standard (“MATS”) for power plants which is expected to have sweeping impacts on coal-fired generation, potentially resulting in massive future retirements of coal plants. Just two days later, on December 23, 2011, EPA proposed a rule allowing states, subject to Clean Air Act requirements for mitigating regional haze, to use CSAPR’s trading program in lieu of Best Available Retrofit Technology (“BART”) requirements. Future rules for the power sector are in the making. EPA has announced its anticipation of additional proposed rules which would regulate cooling water discharge, set greenhouse gas emission standards for new or modified power plants and address the disposal of coal combustion residuals.
 
Where does this leave power producers, power purchasers and the fuel markets? The primary answer is – with a great deal of uncertainty. Those most likely to be affected by this stay are the natural gas producers. Natural gas prices recently dropped to ten-year lows. Core power sector demand has not come close to matching the burgeoning supply of natural gas in the United States. If CSAPR had gone into effect on January 1, 2012, as expected, the additional demand from generators seeking to lower emissions by switching to the relatively cleaner natural gas, may have helped to balance supply and demand. However, without the regulatory boost from CSAPR, already rock bottom prices for natural gas now could drop even further. Ironically, such low prices for natural gas could ultimately lead to a major increase in price volatility for both natural gas and electricity by forcing natural gas producers to cut back sharply on drilling, setting the stage for steep future price increases which could have been avoided if market conditions were more stable. Other sectors could also be affected. At least for a period of several years, extremely low natural gas prices could have a substantial effect on the nascent renewable energy industry and sharply inhibit energy efficiency efforts. 
 
Finally, although the DC Circuit’s stay does not directly affect other EPA rules, the real world effect may prove otherwise. Because CSAPR would have significantly increased the cost for operating coal-fired plants that have not yet been fully outfitted with pollution control equipment, it would have forced power producers to make quick decisions on whether to retrofit or retire those plants subject to MATS and/or other new EPA initiatives.  Now that this source of immediate pressure is gone, power producers are more likely to delay decisions regarding how they will comply with other EPA rules, including the recently promulgated MATS.
 
Who, besides the major power producers, needs to stay abreast of the DC Circuit’s further actions on CSAPR? Manufacturers in energy intensive industries, who use large amounts of electricity and natural gas for both boiler fuel and feedstock, and commercial lenders to these entities, may be the most affected by how the Court ultimately rules.  In addition, any entity that has a long-term interest in the price of electricity and natural gas (including commercial real estate owners and property managers), “big box” stores and tenants in office buildings and malls could also feel the effect.  Stay tuned – the April 2012 time frame that the Court of Appeals has set for a hearing is just around the corner.  
 
 

Questions regarding this advisory should be addressed to Julie A. Weisman (202-623-5712, jweisman@clm.com), Andrew D. Weissman (202-623-5703, weissman@clm.com), Christine A. Fazio (212-238-8754, fazio@clm.com), and Michael K. Plumb (212-238-8794, plumb@clm.com).


Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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